Chapter 3 Revenue Recognition
True/False
[QUESTION]
1. The underlying principal in ASC Topic 606 is that an entity recognizes revenue to
depict the transfer of promised goods or services to customers in an amount that reflects
the consideration expected to be exchanged for those goods or services.
2. Amounts received from the sale of gift cards should be recognized by the seller at the
time of sale.
3. Under a consignment arrangement, revenue is not recognized until the consigned
goods are sold to a third party.
4. ASC Topic 606 provides a five-step model for evaluating how and when revenue
should be recognized rather than providing detailed industry-by-industry standards.
5. Ann Smith just saw her doctor. After the appointment, she was informed by the
receptionist that the fee for the visit is $75 and that her insurance company will be billed
for the visit. Ann was also notified that her insurance company will pay all of the fee
except for the $20 co-pay, which she pays with her debit card right away. Because the
doctor’s office has not entered into a contract, it would not record revenue until it verifies
that the insurance company will pay.
6. Gamebox sells video-gaming devices, games, and online game subscriptions. The
Gamebox system normally sells for $250 and comes prepackaged with one game. The
average price for games is $30. The company also sells its online game subscription
package, which allows members to download and play one new game per month, for
$240. During the holiday season, the company provides a package deal which includes
the gaming system with two games and a free one-year game subscription for $400. The
company should allocate $192.31of the $400 package purchase price to the gaming
system.
7. Under the percentage-of-completion method, the amount debited to “construction
expense” each period is the actual construction costs incurred in that period.
8. Treating the “billings on construction in progress” account as an off-set (contra) to the
construction inventory account avoids including certain costs and profits twice on the
balance sheet.
9. Prior to ASC Topic 606, the installment sales method of recognizing profit for
accounting purposes is acceptable GAAP if collection of the sales price is not reasonably
assured.
10. Initial franchise fee revenue should be recognized when all material services or
conditions relating to the sale have been substantially performed by the franchisor.
11. The key accounting issue related to bundled (multiple-element) sales transactions is
the amount of revenue to be recognized over the contract period.
12. Both public U.S. companies and companies reporting under IFRS must begin
reporting revenue based on ASC Topic 606 in January 2018. Early adoption is permitted
under both U.S. GAAP and IFRS.
13. Sell4U is an online site that allows its clients to post items for sale. Sell4U charges a
5% brokerage fee for use of the site, payable within 10 days of the sale. As an agent,
Sell4U may recognize revenue for the brokerage fee as soon as an item is sold.
14. Evans Equipment sells, installs, and maintains manufacturing equipment. The typical
sales contract includes the purchase of the equipment, installation, and a five-year
maintenance contract. Most customers choose to trade in the equipment for the new
model at the end of the five-year contract. Evans Equipment should amortize the cost of
installation over five years.
15. Gamebox, a seller of video-gaming systems, games and online gaming subscriptions,
recently made available a coupon that allows its gaming subscription members to extend
their subscriptions by three months at no charge. Subscribers need only to login to the
website using their user name and password and provide the coupon code. Because this
contract modification (from 12 months to 15 months) does not add distinct goods or
services from the original contract, Gamebox need only make a cumulative catch-up
adjustment.
Multiple Choice
[QUESTION]
16. The time that the performance obligation is satisfied for revenue recognition is
usually
a. before the sale.
b. after the sale.
c. at the time of sale.
d. when payment is received.
17. If consideration is received before a contract is identified and the consideration is
nonrefundable, revenue may be recognized if
a. the contract has been terminated.
b. goods have been delivered.
c. there is no remaining obligation to transfer goods.
d. any of these answer choices is correct.
18. Under ASC Topic 606 guidance for revenue recognition, all of the following
conditions must be met to account for a contract with a customer, except
a. the contract has commercial substance.
b. collection is likely.
c. each party’s rights are identified regarding goods or services to be exchanged.
d. all parties to the contract have approved the contract.
19. Assuming the requirements for recognizing revenue over time are met, and using the
percentage-of-completion method to recognize revenue, the measure of completion is
computed by dividing
a. profits earned to date by estimated total profits.
b. costs incurred to date by estimated total costs.
c. costs incurred to date by the contract price.
d. profits earned to date by the contract price.
20. Assuming the requirements for recognizing revenue over time are met, and using the
percentage-of-completion method, the profit to be recognized in any year is based on the
completion ratio of
a. incurred contract costs divided by estimated total contract costs.
b. incurred contract costs multiplied by estimated total contract costs.
c. estimated total contract costs divided by incurred contract costs.
d. estimated total contract costs multiplied by incurred contract costs.
REFERENCE: Ref. 03_01
Noah Construction Company is building a large complex for a contract price of
$5,000,000. This is a three-year project and the requirements for recognizing revenue
over time are met. The total estimated cost of the project is $4,000,000 and the following
information is available:
($ in thousands)
Year 1
Year 2
Year 3
Costs incurred
$ 1,000
$ 1,500
$ 1,250
Estimated completion costs
$ 3,000
$ 1,500
$ 0
Billings
$ 750
$ 1,750
$ 2,500
Cash collected
$ 500
$ 1,500
$ 3,000
[QUESTION]
REFER TO: Ref. 03_01
21. Using the percentage-of-completion method of revenue recognition, how much
income is recognized in Year 2?
a. $250,000
b. $375,000
c. $625,000
d. $3,125,000
22. Using the percentage-of-completion method of revenue recognition, how much
income is recognized in Year 3?
a. $375,000
b. $625,000
c. $1,000,000
d. $1,250,000
23. Which one of the following entries would be made in Year 1 to record the costs
incurred using the percentage-of-completion method of revenue recognition?
a.
DR Inventory: Construction in progress
$1,000,000
CR Accounts payable, cash, etc.
$1,000,000
b.
DR Inventory: Construction in progress
$1,000,000
CR Income on long-term construction contract
$1,000,000
c.
DR Inventory: Construction in progress
$1,000,000
CR Billings on construction in progress
$1,000,000
d.
DR Income on long-term construction contract
$1,000,000
CR Accounts payable, cash, etc.
$1,000,000
24. Which one of the following entries would be made in Year 1 to record the income
recognized using the percentage-of-completion method of revenue recognition?
a.
DR Inventory: Construction in progress
DR Construction expense
CR Construction revenue
$1,250,000
b.
DR Inventory: Construction in progress
CR Billings on construction in progress
$375,000
c.
DR Inventory: Construction in progress
CR Billings on construction in progress
$675,000
d.
DR Income on long-term construction contract
CR Accounts payable, cash, etc.
$3,125,000
25. Which one of the following entries would be made in Year 2 to record the customer
billing using the percentage-of-completion method of revenue recognition?
a.
DR Accounts receivable
$1,500,000
CR Cash
$1,500,000
b.
DR Accounts receivable
$1,500,000
CR Billings on construction in progress
$1,500,000
c.
DR Accounts receivable
$1,750,000
CR Income on long-term construction contract
$1,750,000
d.
DR Accounts receivable
$1,750,000
CR Billings on construction in progress
$1,750,000
26. Using revenue recognition standards prior to ASC Topic 606, which one of the
following entries would be made in Year 3 to record the completion and acceptance of
the project using the completed-contract method of revenue recognition?
a.
DR Inventory: Construction in progress
$5,000,000
CR Billings on construction in progress
$5,000,000
b.
DR Billings on construction in progress
$5,000,000
CR Inventory: Construction in progress
$3,750,000
CR Income on long-term construction contract
$1,250,000
c.
DR Inventory: Construction in progress
$3,750,000
DR Income on long-term construction contract
$1,250,000
CR Billings on construction in progress
$5,000,000
d.
DR Billings on construction in progress
$1,250,000
CR Inventory: Construction in progress
$1,250,000
27. Borden Construction entered into the following contracts with Lovely Landscaping,
LLP: (1) construct a paver patio, (2) plant trees, and (3) landscape planting beds for a
new home construction project. Lovely Landscaping should treat the contracts
a. as a single contract.
b. as three separate contracts.
c. as two contracts—one for hardscaping and one for landscaping.
d. None of these.
28. Prior to ASC Topic 606 for revenue recognition, when losses occur on long-term
contracts using the completed-contract method, they are recognized
a. proportionately over the contract period using costs incurred as a base.
b. evenly over the contract period.
c. in their entirety as soon as it becomes known that a loss will be suffered.
d. at the completion of the project.
REFERENCE: Ref. 03_02
On January 1, 2018, Monroe Contractors signed a contract to inspect and complete
needed repairs to the water lines for the town of Pleasantville. Because Monroe will not
know which water lines will need repairs until after it completes the inspections, it is
difficult to accurately estimate the amount it will charge the town. Therefore, Monroe
29. Using a completed-contract method prior to ASC Topic 606 for revenue recognition,
if Monroe had $1.5 million in its Construction In Progress Inventory account and billings
to Pleasantville of $2 million as of December 31, 2018, how much net income should
Monroe Construction recognize for 2018?
a. $0
b. $500,000
c. $2 million
d. $1.5 million
30. Which of the following is not a permitted simpler approach to revenue recognition
under ASC Topic 606 for revenue recognition?
a. Applying the 5-step model to a portfolio of similar contracts
b. Using the previous revenue recognition rules instead of the 5-step model.
c. Not adjusting for significant financial components if the contract period is one year or
less.
d. Recognizing revenue for the amount invoiced to the customer.
31. Burgers and More operates a chain of fast-food restaurants across the United States.
The restaurants are franchised operations. Under the franchise agreement, restaurant
owners have the right to use the Burgers and More trade name, financing arrangements
for franchisees, and management training at the corporate headquarters as well as the
right to use training videos for their employees. The Burgers and More franchise
contracts contain the following separate performance obligations:
a. intellectual property, training
b. intellectual property, financing, and training
c. intellectual property
d. financing and training
32. Which of the following criteria must be met to recognize revenue under a bill-and-
hold arrangement?
a. The reason for the bill-and-hold arrangement is substantive.
b. The product is identified separately as belonging to the customer.
c. The product is ready for physical transfer to the customer
d. All of these criteria must be met to recognize revenue under a bill-and-hold
arrangement.
REFERENCE: Ref. 03_03
Ford Appliance Center records revenue on the installment sales method, prior to ASC
Topic 606 for revenue recognition. The following information is available for the first
two years of business.
Year 1
Year 2
Sales
$200,000
$250,000
Cost of goods sold
140,000
162,500
Cash collections:
Year 1 sales
100,000
80,000
Year 2 sales
130,000
[QUESTION]
REFER TO: Ref. 03_03
33. How much realized gross profit on installment sales will Ford recognize in Year 1?
a. $20,000
b. $30,000
c. $60,000
d. $100,000
34. Assume that Ford Appliance Center has consistently recognized revenue on
installment sales using the cost recovery method. How much realized gross profit on
installment sales will Ford recognize in Year 1?
a. $0
b. $30,000
c. $60,000
d. $100,000
35. How much realized gross profit on installment sales will Ford recognize in Year 2?
a. $24,000
b. $45,500
c. $69,500
d. $130,000
36. Which one of the following entries properly records the installment sales for Year 2?
a.
DR Accounts receivable—Year 1
$200,000
DR Accounts receivable—Year 2
$250,000
CR Realized gross profit on installment sales
$450,000
b.
DR Realized gross profit on installment sales
$250,000
CR Installment sales revenue
$250,000
c.
DR Installment sales revenue
$250,000
CR Realized gross profit on installment sales
$250,000
d.
DR Accounts receivable—Year 2
$250,000
CR Installment sales revenue
$250,000
37. Which one of the following entries properly records the cost of installment goods sold
for Year 2?
a.
DR Cost of installment goods sold
$162,500
CR Inventory
$162,500
b.
DR Cost of installment goods sold
$302,500
CR Inventory
$302,500
c.
DR Cost of installment goods sold
$162,500
CR Installment sales revenue
$162,500
d.
DR Cost of installment goods sold
$302,500
CR Installment sales revenue
$302,500
38. Which of the following is not a factor that indicates multiple performance obligations
in a contract?
a. The integration of multiple goods and services provides a significant service to the
customer.
b. One or more of the goods or services significantly modifies other goods or services
promised in the contract.
c. The goods or services in the contract are highly interdependent or interrelated.
d. All of these are factors.
39. CPA Now developed an app to help prepare for the CPA exam. Customers may
separately purchase (a) the app, (b) updates to the app, and (c) coaching support for the
exam, or a package that includes the app and free updates coaching support until they
pass the exam. The package deal includes performance obligation(s).
a. one
b. two
c. three
d. zero
40. Yashito Corporation sells cameras and accessories. The company’s newest model,
popular with preteens, takes wallet-sized instant photos. The wholesale price for this
camera is $50. In addition, the company sells carrying cases ($25), film cartridges ($15),
and selfie lenses ($10) made especially for this camera. During the holiday season,
Yashito offers the camera, film, carrying case, and selfie lens as a package for $75. For
each package sold, the transaction price allocated to the camera is
a. $100.
b. $75.
c. $50.
d. $37.50.
41. Under ASC Topic 606 for revenue recognition, a performance obligation is
considered satisfied when control over the goods and services is transferred to the
customer. Which of the following is not an indicator that control has transferred?
a. The customer is legally obligated to pay for the goods or services.
b. The customer has legal title of the goods.
c. The customer has accepted the goods and has physical possession of the goods.
d. All of these are indicators that control has transferred.
42. Hargren Publishing offers its Accounting textbooks as e-texts through its online
homework management system. Purchase of an access code provides the student with
access to the e-text and online learning materials for six months. During that time,
students have access to updates to the text and learning materials. Hargren should
recognize revenue for purchases of access codes
a. at the end of the six-month access period.
b. when they occur.
c. over the six-month period during which the customer has access.
d. at the beginning of the semester in which the student will use the access code.
43. In 2017, Borden Construction was contracted to build an apartment complex for its
client, Deer Park Realty Management. The project was estimated to cost $15 million;
however, on December 31, 2017, when the project was 75% complete, Borden estimated
that the project costs would be much less, and agreed to adjust the contract price to $10
million. Prior to December 31, 2017, Borden Construction had recognized revenue of $10
million. At year end, Borden should
a. make a correction for $2.5 million in over-recognized revenue.
b. record nothing.
c. record additional $5 million in revenue.
d. make a correction for $5 million in over-recognized revenue.
44. Continuing franchise fees that are based on the franchisee’s percentage of sales
should be recognized by the franchisor as revenue
a. when the fee is received.
b. over time when the sales are reported to the franchisor.
c. in accordance with the franchise agreement.
d. only after the balance of the initial franchise fee has been received.
45. Initial franchise fees should be recorded as revenue by the franchisor
a. in accordance with the franchise agreement.
b. when cash is received from the franchisee.
c. when all material services relating to the sale have been performed.
d. during the year the franchise agreement is signed.
46. Under GAAP prior to ASC Topic 606 for revenue recognition, which of the following
conditions is not necessary for a seller to recognize revenue at time of sale when a right
of return exists?
a. The seller’s price to the buyer is fixed.
b. The buyer has paid the seller.
c. The goods must have been delivered under a formal consignment arrangement.
d. The amount of future returns can be reasonably estimated.
47. GAAP prior to ASC Topic 606 for revenue recognition specifies that for a seller to
record revenue at time of sale when right of return exists the following conditions must
be met except:
a. The seller’s price to the buyer is substantially fixed or determinable at the date of sale.
b. The buyer has paid the seller, or the buyer is obligated to pay the seller and the
obligation is not contingent on resale of the product.
c. The buyer’s obligation to the seller does not change in the event of theft or physical
destruction or damage of the product.
d. The buyer is a special purpose entity established by the seller for the sole purpose of
buying and reselling the seller’s product.
48. The key accounting issue related to bundled products such as software licenses and
technical support
a. is the method of revenue recognition.
b. is the amount of revenue to recognize over the life of the contract.
c. depends on whether the customer is able to pay for the contracted services.
d. concerns the amount of transaction price to allocate to each contract element.
49. Under ASC Topic 606 for revenue recognition, which of the following statements is
not accurate regarding performance obligations?
a. Firms must disclose qualitative information about their performance obligations.
b. Firms must disclose warranties provided.
c. Firms are not required to disclose any judgments used to apply the standard.
d. Firms must disclose the aggregate amount of the transaction price allocated to
unsatisfied performance obligations.
50. Examples of variable consideration include all of the following except
a. penalties for not completing performing on a contract on time.
b. bonuses for completing performance on a contract early.
c. discounts on transaction prices.
d. all of the answer choices are correct.
51. A right of return exists when
a. the customer is entitled to a full or partial refund.
b. the customer is entitled to a credit against amounts owed.
c. the customer is entitled to another product in exchange.
d. any one of these conditions is met.
52. Under ASC Topic 606 for revenue recognition, which of the following factors is not
an indicator of the principal/agent determination?
a. Inventory risk.
b. Credit risk.
c. Shipping terms.
d. Control of prices of the goods or services.
53. Which of the following disclosures is not required by ASC Topic 606 guidance for
revenue recognition?
a. Explanation of significant changes in contract assets and liabilities.
b. Beginning and ending balances of contract assets and liabilities.
c. Amount of revenue recognized in the current period that was included in the beginning
contract liability balance.
d. Financial stability of major customers.
54. Under the new revenue recognition guidance in ASC Topic 606, a performance
obligation is satisfied over time if
a. the customer simultaneously receives and consumes the goods and services provided
by the firm.
b. the firm’s performance creates or enhances an asset under the customer’s control.
c. the firm’s performance does not create an asset with an alternative use and the firm has
a right to receive payment for its performance to date.
d. any of these answer choices is correct.